Budget and Debt

by Maggie McCormick

When you've got a mountain of debt piling up, you need to start cutting back. A budget is a great way to start, because it allows you to see where you're spending your money. When you budget, you divide your expenses into different categories, such as rent, groceries, or entertainment, and you determine how much of your salary you will allocate to each, to avoid overspending.

How Budgeting Affects Debt

Budgeting allows you to see where you have money coming in, and where you have money going out. A clear view of your finances helps you make adjustments to reduce costs, and frees up more money to pay down debt. The more money you can pay towards your debt, the faster you'll pay it off. If you're only making minimum payments, you're never going to put a big dent into your debt.

Setting Up Your Budget

The first thing that you have to do is track the money that you're spending. You can do this by saving receipts for a month. Then, divide your receipts into categories -- common categories include rent, groceries, clothing, utilities and entertainment. Don't forget recurring expenses that don't occur monthly, like your car insurance payment. You can track your expenses in a spreadsheet. You can create your own, or download a free one from a financial website. Set aside some money for non-recurring expenses that might pop up, like car repairs or a vacation. You could estimate how much these miscellaneous expenses might cost and average it out throughout the year.

Types of Budgeting

Keeping track of your finances with a spreadsheet, or through a software program, are popular options. You can then generate graphs that let you see where you're spending your money. Another method is the "envelope method." If you follow this one, you designate a certain amount of money per category, then place that cash into envelopes. You can only spend the money that's in the envelope, for that category. For example, if you've allotted just $100 for groceries this week, you take that $100 with you and only spend that much. In the Quinn-CO method, you assign percentages to your categories, such as allotting 20 percent of your income for housing and 10 percent for groceries.

Adjusting Your Budget

If you want to pay off debt, you need to look for ways that you can reduce your costs. Look at your budget and see where you're spending the most money -- then brainstorm ways that you can reduce that spending. For example, if you notice a lot of money being spent in the "clothing" category, you can reduce your monthly clothing budget and save a lot of money. When you reduce your expenses in every category, it's important to apply that extra money towards your debt.